Is Allergan Worth More or Less After J&J Buys Mentor? (MNT, JNJ, AGN)
You have probably heard about the acquisition where Johnson & Johnson (NYSE: JNJ) is acquiring Mentor Corp. (NYSE: MNT). Frankly, now that we took a look this deal is not at all that surprising and we are not that surprised that the $31.00 is nearly a 100% premium to Friday’s price of Mentor. But what is surprising is that the merger is putting severe pressure today on Allergan Inc. (NYSE: AGN).
Allergan is down over 8% late in the day with under 30 minutes to the market close. The $34.00 price is at the bottom of its 52-week trading range of $28.95 to $70.40. Allergan competes against Mentor on many fronts and it is hard to imagine that J&J would be a weaker competitor.
But there is also a question here: Does the merger of Mentor actually make Allergan more valuable rather than less valuable? The $31.00 price makes Mentor trade at 28-times this year’s earnings and almost 26-times next year’s earnings. Today’s reduced Allergan price puts Allergan at 13.3-times this year’s earnings estimates and 12.4-times next year’s earnings estimates.
The companies are on different fiscal calendars but this at least shows a huge disparity you would otherwise not expect. The price to cash and price to tangible book values after backing out debt and intangibles are not way out of whack on either company. Allergan does carry a much high debt load, although on a comparable basis these are now currently similar. That means that Allergan is more leveraged based upon the new prices.
Allergan and Mentor both have these businesses which have been great but may be maturing. It is easy to predict that breast implants, liposuction, wrinkle treatments and other cosmetic treatments are not recession proof.
The market movements of the current cycle are making direct comparisons more and more difficult for traders and investors alike. But if this was a normal market and if companies were able to be evaluated properly, then it may seem like too much value has been taken out of Allergan on this.
Jon C. Ogg
December 1, 2008
